{"id":7678,"date":"2022-04-18T21:52:17","date_gmt":"2022-04-18T21:52:17","guid":{"rendered":"http:\/\/lonecandle.com\/?p=7678"},"modified":"2022-04-18T21:52:17","modified_gmt":"2022-04-18T21:52:17","slug":"how-i-and-us-policymakers-got-inflation-wrong","status":"publish","type":"post","link":"https:\/\/lonecandle.com\/?p=7678","title":{"rendered":"How I (and US policymakers) got inflation wrong"},"content":{"rendered":"\n

\n\n“At the time I wrote my July 2021 piece, \u201cDon\u2019t worry about inflation,\u201d<\/a> a prescient copy editor noted that this headline might look bad if I was wrong and inflation got increasingly worse. I responded that I stood by it, and if I was wrong, I would write a groveling follow-up piece.<\/p>\n\n\n\n

So here we are.”<\/p>\n\n\n\n

…<\/p>\n\n\n\n

“I unfairly dismissed the most boring, Econ 101 explanation for why inflation happens: that there was too much money sloshing around for the amount of stuff the economy was able to produce \u2014 meaning the price of that stuff went up.”<\/p>\n\n\n\n

…<\/p>\n\n\n\n

“Past stimulus checks during non-pandemic episodes have been disproportionately spent on durable goods<\/a>, rather than services, suggesting that the stimulus checks might have accelerated this phenomenon just as the virus did. And because prices of goods tend to be less \u201csticky\u201d than prices of services (meaning they tend to rise and fall more easily), this especially contributed to inflation.<\/p>\n\n\n\n

This surge in spending led to big, well-publicized shortages in certain areas, most famously cars<\/a>, as demand for durable goods outstripped the economy\u2019s ability to produce them (sick workers limiting production was a factor, too, if a smaller one<\/a>). That provoked localized price spikes on a few goods. And because oil producers slowed production in expectation of a big post-Covid recession, they too struggled to keep up with demand, so gas prices rose \u2014 which Putin\u2019s invasion of Ukraine only worsened<\/a>.<\/p>\n\n\n\n

For a while, many commentators thought you could wave off inflation fears by saying it was just limited in a few sectors. But at this point, an \u201cinflation in a few places\u201d theory doesn\u2019t really fly.<\/p>\n\n\n\n

Some goods, like oil and cars, have specific narratives like a chip shortage or low drilling that could explain inflation. But as Bloomberg\u2019s John Authers has detailed<\/a>, inflation is still rising even if you exclude those goods. The Dallas Fed\u2019s \u201ctrimmed mean\u201d inflation measure, which purposely removes \u201coutliers\u201d where prices are rising extremely fast or extremely slow from the data, started to shoot up recently, too.”<\/p>\n\n\n\n

…<\/p>\n\n\n\n

“Due to a combination of rapidly growing wages through all of 2021, plus trillions in government fiscal support, there has just been too much money around combined with insufficient goods and services to spend it on.<\/p>\n\n\n\n

That\u2019s led to not just inflation but accelerating inflation, as wage increases contribute to price increases and higher expectations of future inflation contribute to higher immediate inflation. That\u2019s why you\u2019ve started to see inflation in categories beyond just gas and cars. It\u2019s a situation similar to what NAIRU would predict, except I would argue it\u2019s not really about low unemployment.”<\/p>\n\n\n\n

https:\/\/www.vox.com\/22996474\/inflation-federal-reserve-nairu-ngdp-powell<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

“At the time I wrote my July 2021 piece, \u201cDon\u2019t worry about inflation,\u201d a prescient copy editor noted that this headline might look bad if I was wrong and inflation got increasingly worse. I responded that I stood by it, and if I was wrong, I would write a groveling follow-up piece.<\/p>\n

So here we are.”<\/p>\n

…<\/p>\n

“I unfairly dismissed the most boring, Econ 101 explanation for why inflation happens: that there was too much money sloshing around for the amount of stuff the economy was able to produce \u2014 meaning the price of that stuff went up.”<\/p>\n

…<\/p>\n

“Past stimulus checks during non-pandemic episodes have been disproportionately spent on durable goods, rather than services, suggesting that the stimulus checks might have accelerated this phenomenon just as the virus did. And because prices of goods tend to be less \u201csticky\u201d than prices of services (meaning they tend to rise and fall more easily), this especially contributed to inflation.<\/p>\n

This surge in spending led to big, well-publicized shortages in certain areas, most famously cars, as demand for durable goods outstripped the economy\u2019s ability to produce them (sick workers limiting production was a factor, too, if a smaller one). That provoked localized price spikes on a few goods. And because oil producers slowed production in expectation of a big post-Covid recession, they too struggled to keep up with demand, so gas prices rose \u2014 which Putin\u2019s invasion of Ukraine only worsened.<\/p>\n

For a while, many commentators thought you could wave off inflation fears by saying it was just limited in a few sectors. But at this point, an \u201cinflation in a few places\u201d theory doesn\u2019t really fly.<\/p>\n

Some goods, like oil and cars, have specific narratives like a chip shortage or low drilling that could explain inflation. But as Bloomberg\u2019s John Authers has detailed, inflation is still rising even if you exclude those goods. The Dallas Fed\u2019s \u201ctrimmed mean\u201d inflation measure, which purposely removes \u201coutliers\u201d where prices are rising extremely fast or extremely slow from the data, started to shoot up recently, too.”<\/p>\n

…<\/p>\n

“Due to a combination of rapidly growing wages through all of 2021, plus trillions in government fiscal support, there has just been too much money around combined with insufficient goods and services to spend it on.<\/p>\n

That\u2019s led to not just inflation but accelerating inflation, as wage increases contribute to price increases and higher expectations of future inflation contribute to higher immediate inflation. That\u2019s why you\u2019ve started to see inflation in categories beyond just gas and cars. It\u2019s a situation similar to what NAIRU would predict, except I would argue it\u2019s not really about low unemployment.”<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[13],"tags":[217,165,1316,1407],"class_list":["post-7678","post","type-post","status-publish","format-standard","hentry","category-article-share","tag-economics","tag-economy","tag-inflation","tag-prices"],"_links":{"self":[{"href":"https:\/\/lonecandle.com\/index.php?rest_route=\/wp\/v2\/posts\/7678","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/lonecandle.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/lonecandle.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/lonecandle.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/lonecandle.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=7678"}],"version-history":[{"count":1,"href":"https:\/\/lonecandle.com\/index.php?rest_route=\/wp\/v2\/posts\/7678\/revisions"}],"predecessor-version":[{"id":7679,"href":"https:\/\/lonecandle.com\/index.php?rest_route=\/wp\/v2\/posts\/7678\/revisions\/7679"}],"wp:attachment":[{"href":"https:\/\/lonecandle.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=7678"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/lonecandle.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=7678"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/lonecandle.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=7678"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}